Abstract

This paper aims to study zero nominal interest rates and why they are good, and the division of our economy into two, that Is, non-monetary and monetary economies. In order to achieve this, we consider one-sector neoclassical growth model. In this model, we first consider economies that have no money. We suppose that the consumption and capital stock paths in this environment are Pareto optimal. Then we enter the money with a cash-in-advance constraint into the model and obtain the consumption and capital stock paths and compare with Pareto optimal consumption and capital stock paths. To study the effect of nominal interest rate on the optimum path of these variables, we define two zero and non-zero nominal interest rate scenarios. We will see that in a standard one-sector neoclassical growth model, in which money is introduced with a cash-in-advance constraint, zero nominal interest rates are optimal.

Key words: Nominal interest rate, cash-in-advance constraint, optimal consumption, optimal capital stock, Pareto optimal.